Is Lowe’s Under-investing? Earnings Analysis

Lowe’s Companies, Inc. (NYSE:LOW) discussed its Q2 2013 earnings yesterday. Both Lowe’s and its rival The Home Depot, Inc. (NYSE:HD) have benefitted this quarter from home improvement projects as home values improve; home improvement spending is up by more than 25% in the last two years. We analyzed Home Depot’s earnings yesterday in The Home Depot, Inc. (NYSE:HD) bringing new life to old wood?

Are Lowe’s returns sustainable? Find out with this free report.

Based on the preliminary financial results for the quarter ended 2013-07-31 we analyze Lowe’s relative to its peers (peer list at the end of this post). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million)

2013-07-31

2013-04-30

2013-01-31

2012-10-31

2012-07-31

Revenues

15,711.0

13,088.0

11,046.0

12,073.0

14,249.0

Revenue Growth %

20.0

18.5

(8.5)

(15.3)

8.3

Net Income

935.0

537.0

286.0

393.0

742.0

Net Income Growth %

74.1

87.8

(27.2)

(47.0)

41.6

Net Margin %

6.0

4.1

2.6

3.3

5.2

ROE % (Annualized)

28.4

15.8

8.1

10.8

19.8

ROA % (Annualized)

11.0

6.4

3.4

4.6

8.2

Valuation Drivers

Lowe’s Companies, Inc. (NYSE:LOW) trades at a lower Price/Book multiple (3.7) than its peer median (5.3). The market expects the company to grow at about the same rate as its chosen peers (PE of 23.1 compared to peer median of 22.5) and to maintain the peer median return (ROE of 15.4%) it currently generates.

The company’s profit margins are below peer median (currently 4.1% vs. peer median of 5.3%) while its asset efficiency is about median (asset turns of 1.5x compared to peer median of 1.9x). Lowe’s Companies’ net margin continues to trend upward and is now similar to its five-year average net margin of 4.0%.

Growth & Investment Strategy

Lowe’s Companies’ revenues have grown at about the same rate as its peers (2.3% vs. 2.3% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 23.1. The historical performance and long-term growth expectations for the company are largely in sync.

The company’s annualized rate of change in capital of -1.7% over the past three years is less than its peer median of -0.6%. This investment has generated a peer median return on capital of 8.0% averaged over the same three years. The median return on capital investment on a relatively lower investment suggests that the company is under investing.

Trend Charts

Peers used for analysis of Lowe’s Companies, Inc.

We used the following peer-set in our analysis: The Home Depot, Inc. (NYSE:HD), Kingfisher plc (OTCMKTS:KGFHY), Lumber Liquidators Holdings Inc (NYSE:LL) and Sears Holdings Corp (NASDAQ:SHLD).